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Ghost kitchens are becoming a very real business

Workers in a kitchen.
Unsplash/Michael Browning
The restaurant is changing.
  • Michelle Cheng
By Michelle Cheng

Reporter

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When the pandemic hit, Samuel Dennigan, the CEO of Strong Roots, a brand of organic frozen food, was no longer able to place free samples inside supermarkets. So he had to find another way to market his product. In April 2020, Dennigan turned to an operator of a ghost kitchen, which is a commercial kitchen without a storefront. Over Skype, he would discuss with the owner how they could turn his Strong Roots products into hot offerings—buffalo-flavored cauliflower, hash browns, and breakfast sandwiches—without needing to hire a chef or find a kitchen. The meals under the Strong Roots brand launched this week at the Hudson Hound bar and restaurant in the West Village.

Dennigan says he thought the best way to connect with people was directly via retail. Only during the pandemic did he realize his products had a potential place on menus.

Ghost kitchens are becoming a more serious business. Pre-pandemic, they were expected to account for 10% to 15% of the $66 billion US restaurant industry. Now that number is supposed to climb to 21% by 2025, according to a May report from CBRE, a real estate firm.

Startups, as well as restaurants, are turning to ghost kitchens to prepare meals or to run commercial kitchens for multiple brands. Last year, for instance, Just Us Wings utilized the kitchens of 1,050 Chili’s and Maggiano’s locations. The CEO of Dine Brands, the parent company of IHOP and Applebee’s, is exploring ghost kitchens as a new source of revenue. Founded in 2011, Rebel Foods, a ghost kitchen operator in India, has more than 200 kitchens across 18 cities and generated $40 million in revenue in 2019. Last year, it partnered with Wendy’s to expand the US-based fast-food chain’s presence into India. Even Resorts World Las Vegas hotel operates a ghost kitchen.

They tend to be in dense, urban centers, and have more of a global presence. To date, 1,500 ghost kitchens are located in the US, at least 7,500 in China, at least 3,500 in India, and 750 in the UK, according to Euromonitor, a research company.

It’s not clear how profitable this business model is just yet, but investors, including Sequoia and Y Combinator, have taken interest and invested $55 billion into ghost kitchens, according to PitchBook, a research firm.

Delivery was a lifeline for restaurants during the pandemic, but now it is providing a new economy for restaurants to operate in.

Why is this happening

The pandemic is giving restaurants an opportunity to re-think their business models, particularly, with many restaurants not operating at full capacity.

Ghost kitchens reduce some of the biggest costs in the industry from real estate to labor. With ghost kitchens, specifically, several businesses can use the commercial kitchen space. (For context, the rent and staff costs account for 60% of the price of a Starbucks latte.) “That gives restaurant operators to do something on a whole different economic scale,” says Portalatin, a food industry analyst at NPD, a market research company.

They also help lower the barriers of entry, as well as invite more experimentation and creativity into the industry, experts say. Portalatin compares it to the next iteration of the food truck craze, where there is a low-cost way to try out new concepts, before evolving that into a brick-and-mortar, and then eventually chain. That could happen with ghost kitchens. But that’s not to say the restaurant is going away, as people like the experience of dining, he says. A separate question though is will employment be as much as before.

What has led to this

When we talk about the future of restaurants, it’s worth looking at what is leading to the changes, says Portalatin. For the past few years, meals are increasingly eaten at home, and that number is expected to grow as more people work from home and the population continues to age, he says.

That coincides with the dramatic increase in consumers ordering from food delivery apps, with the smartphone being the enabler, says Portalatin. The pandemic has accelerated the demand for delivery, and the number is expected to grow; 17% of all restaurant orders in May 2021 were placed digitally, up from 4% that period last year, according to NPD data. “We’re not going backwards. We’re not going to that pre-pandemic level of digital ordering,” he says. “It’s going to be a really sticky behavior.”

Is the concept of ghost kitchens sustainable?

Ghost kitchens still face a number of hurdles. Since they are smaller than that of a typical restaurant’s, these kitchens work better for less complicated foods such as wings or burgers.“You can really get your costs so low before you start reducing the quality of the food,” says Damola Adamolekun, the CEO of PF Chang’s. He says that if he was starting a wing shop or burger joint, he would start one via a ghost kitchen given that it requires little capital.

They also face the challenge of finding real estate. The further you get away from the customer, the more expensive it gets, says Jim Crocenzi, a CBRE analyst, who focuses on retail services in the Los Angeles market. These kitchens are also competing with traditional restaurants as well as traditional industrial uses for space, he says.

But Dennigan, of Strong Roots, sees ghost kitchens as being analogous to the shift of retail to e-commerce. “Much like the rise of Amazon retail for consolidation of distribution off of one platform, the same thing is happening from a food production perspective, especially when it’s hot served at home as opposed to conventional retail,” he says.

Seeing what e-commerce has done for retail, allowing many brick-and-mortar stores to sell online, that suggests how ghost kitchens still have room to grow.

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